ITALTILE

Basis of preparation

The preliminary condensed consolidated financial statements are prepared in accordance with the requirements of the JSE Limited Listings Requirements for preliminary reports and the requirements of the Companies Act of South Africa. The Listings Requirements require preliminary reports to be prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards ("IFRS") and the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by Financial Reporting Standards Council and to also, as a minimum, contain the information required by IAS 34 Interim Financial Reporting. The accounting policies applied in the preparation of the condensed consolidated financial statements are in terms of IFRS and are consistent with those applied in the previous consolidated annual financial statements. These results have been prepared under the supervision of Executive Director: Group Finance and Administration.

New standards, interpretations and amendments adopted

The accounting policies adopted in the preparation of these preliminary condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 30 June 2018, except for the adoption of new standards effective as of 1 January 2018. The Group has elected to early adopt International Financial Reporting Standards ("IFRS") 16 Leases which has been issued but is not yet effective.

The Group applies, for the first time, IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments. As required by IAS 34, the nature and effect of these changes are disclosed below.

IFRS 9 Financial Instruments

IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting. The Group has elected to apply the standard using the modified retrospective approach.

The Group assessed its financial assets and liabilities and based their classification and measurement on the business model of the Group and on the cash flows associated with each asset and liability. This resulted in a change in the classification of financial assets, but the measurement thereof remained the same. Therefore the application of this standard did not have a quantitative impact on the Group's opening retained earnings and reported results and cash flows for the year ended 30 June 2019 and the financial position of the Group.

IFRS 15 Revenue from Contracts with Customers

The standard is effective for accounting periods beginning on or after 1 January 2018 and was adopted by the Group on 1 July 2018. The Group elected to apply the modified retrospective approach. A key area has been the clarity provided on the treatment of 'bill and hold' arrangements which are in use within the Group. The manner in which we will account for these sales will not be different under IFRS 15 when compared to IAS 18. The process that we have in place for these sales ensures that we meet the additional criteria contained in paragraph B81 of IFRS 15 that need to be met in order for the customer to have obtained control in a 'bill and hold' arrangement.

The application of this standard did not have a significant impact on the opening retained earnings, reported results, cash flows for the year ended 30 June 2019 and the financial position of the Group.

IFRS 16 Leases

The Group has opted for the early adoption of IFRS 16 Leases using the modified retrospective approach by recognising the cumulative effect of initially applying IFRS 16 as an adjustment to the opening balance of equity at 1 July 2018. Therefore, the comparative information has not been restated and continues to be reported under IAS 17 Leases and related interpretations. The Group has elected not to recognise deferred tax on IFRS 16 balances.

The Group has elected to use the exemptions applicable to the standard on lease contracts for which the lease terms end within 12 months as of the date of initial application, and lease contracts for which the underlying asset is of low value. The Group has leases of certain office equipment that are considered of low value. During 2018, the Group performed a detailed impact assessment of IFRS 16. As at 30 June 2019, the Group had 87 property leases and 107 non-property leases.

The effect of adopting IFRS 16 is as follows:

Impact on the statement of financial position as at the transition date of 1 July 2018:

Lease premiums of R39 million have been reclassified from long-term assets to right-of-use assets. These premiums, however, have not been included in the above breakdown.

Impact on the statement of comprehensive income as at 30 June 2019:

Due to the adoption of IFRS 16, the Group's trading profit will improve, while its interest expense will increase. This is due to the change in the accounting for expenses of leases that were classified as operating leases under IAS 17.

There are no material contingent assets or liabilities at 30 June 2019.

The Group does not fair value its financial assets or liabilities in accordance with quoted prices in active markets or market observables as there is no difference between their fair value and carrying value due to the short-term nature of these items, and/or existing terms are equivalent to market observables. There were no transfers into or out of Level 3 during the year.

The Group acquired a 10% non-controlling stake in Cedar Point Trading 326 Proprietary Limited at the end of August 2018, held by the previous business partner, at a cost of R15,7 million and this increased the Group's interest in this entity to 100%.

During the 2014 financial year, the Group implemented a share incentive scheme for all employees of the Group and its franchisees who had been in the employ of the Group and/or franchise network for a period of three uninterrupted years at each allotment date in August every year from implementation date. As a result, eight million of the Group's shares, net of forfeitures, were held by qualifying staff members at 30 June 2019 (2018: seven million). Until vesting, the shares will continue to be accounted for as treasury shares and have an impact on the diluted weighted average number of shares.

The third allotment of shares in the scheme, granted in 2015, vested on 31 August 2018. A total of 101 employees qualified for the vesting, of which four employees opted to retain the shares and the balance received the net value of the awards in cash. This resulted in a decrease in treasury shares of 1 044 139 (2018: 1 468 409) shares.

The scheme is classified as an equity-settled scheme in terms of IFRS 2, Share-based Payment, and has resulted in a charge of R18 million (2018: R16 million) to the Group's income; R9 million (2018: R9 million) of this charge is a once-off accelerated expense for franchise staff.

No adjustments to earnings are required for diluted earning per share calculations, as the share awards do not have an impact on diluted earnings.

The directors are not aware of any matters or circumstances arising since the end of the reporting period which significantly affect the financial position at 30 June 2019 or the results of its operations or cash flow for the year then ended.